CME must go big to get Nex, break Europe

News that CME is close to launching a formal bid for Michael Spencer’s Nex Group is likely to open-up a bidding war for the assets of the technology and trading business.

This however would not bode well for the US exchange coming with a history of failed attempts to make its mark in Europe.

Last year, the exchange giant closed its London-based derivatives exchange and clearing house, CME Europe under the pretext that customers preferred access to global products through its US infrastructure.

Prior to this, CME tried to buy derivatives broker GFI Group, in the hope it would allow it to expand its European energy and global FX markets. However, it lost out to New York firm BGC Partners, led by Howard Lutnick, who went on to complete the takeover in 2016.

Although CME would be hoping to avoid yet another disappointment in Europe, sources have speculated that some of the London-based broking and technology group’s businesses may not necessarily be the best fit for CME’s existing business.

Therefore despite being the first out of the gates in being outed for its interest, CME is unlikely to be the only exchange that makes an offer.

Nex Group: a multi-faceted business

Depending on who is bidding, Nex will be viewed as either one, two or three or more businesses: Nex Markets, Nex Optimisation, Nex Opportunities and the Nex Exchange.

Nex Markets operates the EBS, Brokertec and the Nex Treasury business providing trading platforms and venues for the FX and fixed income markets.

Nex Opportunities invests in fintech companies to bring new models to capital markets.

Finally the Nex Exchange is the small-cap equity market run by Patrick Birley which holds a Registered Investment Exchange (RIE) licence.

Spin-offs

The US exchange is likely to be bidding for Nex Markets but on the face of it has few synergies with the Optimisation business. And having recently shut its London-based exchange and relinquished its exchange licence it is unlikely to be interested in running the Nex Exchange.

This bid therefore makes it likely that Nex Optimisation will be spun off either after the deal completes or CME could launch a joint bid with another firm with the aim of them taking the Optimisation business post-completion.

IHS Markit, FIS and possibly ION would all make good partners for such a bid or likely targets for a spin-off post completion.

Spencer has clearly recognised the disparate nature of his Nex Group with the decision to organise it into separate clear business lines with different management teams, making a post-sale separation easy to execute.

Barriers

For other exchanges that may enter the bidding, the picture is different. Deutsche Bourse (DB1) is likely to have an interest in more but not all of the Optimisation business and both DB1 and Euronext would surely see appeal in a UK recognised investment exchange licence as a Brexit hedge.

US exchange ICE has the broadest spread of operations out of any exchange group today having acquired a variety of businesses across the infrastructure chain over the past five years. However, it may be less interested in the FX and FX clearing aspects, which would have been good for DB1 for similar reasons as CME, which is still looking to expand into cash, spot and FX after success in the currency futures markets.

DB1 only recently appointed CEO Theodor Weimer late last year, and another other potential competitor LSE Group, who would be looking to protect its clearing business, is currently without a permanent chief executive after long-serving head Xavier Rolet left late last year.

Aside from potential competitors, the US Treasury could potentially stand in the way of CME’s takeover. Sources suggest the Treasury may not be happy about the amount of extra cash trading the move would bring if CME retains Nex’s Brokertec platform, which is the largest platform for trading cash US Treasuries.

Unlocking the value of Nex's assets

One source observed that nowadays it is hard to increase profit margins, which is what the shareholders want, and is what the market is looking to do.

He pointed out that you have to buy assets and integrate them but there are so few assets out there. Therefore part of the premium lies with obtaining the assets - and then of unlocking the value of them.

Meanwhile another source said it is quite plausible that the technology assets within Nex will be sold off following any acquisition.

CME’s options of course depend on whether they indeed do bid for everything, and whether their bid is enough to warn off other potential competitors who could be looking to crush another of CME’s attempts at a European venture.

Eyes will be on the US exchange until April 12, the date by which it must announce whether or not it will follow through with its intention to make an offer.

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